STANDARD NONFORFEITURE LAW FOR INDIVIDUAL …

[Pages:25]Pending Adoption by the Executive (EX) Committee and Plenary, Dec. 9, 2020 Pending Adoption by the Life Insurance and Annuities (A) Committee, Nov. 10, 2020 Adopted by the Life Actuarial (A) Task Force on Oct.8, 2020.

STANDARD NONFORFEITURE LAW FOR INDIVIDUAL DEFERRED ANNUITIES

Table of Contents

Section 1. Section 2. Section 3. Section 4. Section 5. Section 6. Section 7. Section 8. Section 9. Section 10. Section 11. Section 12. Section 13.

Title Applicability Nonforfeiture Requirements Minimum Values Computation of Present Value Calculation of Cash Surrender Values Calculation of Paid-Up Annuity Benefits Maturity Date Disclosure of Limited Death Benefits Inclusion of Lapse of Time Considerations Proration of Values; Additional Benefits Rules Effective Date

Section 1.

Title

This Act shall be known as the Standard Nonforfeiture Law for Individual Deferred Annuities.

Section 2.

Applicability

A.

This Act shall not apply to any reinsurance, group annuity purchased under a retirement plan or plan of

deferred compensation established or maintained by an employer (including a partnership or sole

proprietorship) or by an employee organization, or by both, other than a plan providing individual

retirement accounts or individual retirement annuities under Section 408 of the Internal Revenue Code, as

now or hereafter amended, premium deposit fund, variable annuity, investment annuity, immediate annuity,

any deferred annuity contract after annuity payments have commenced, or reversionary annuity, nor to any

contract which shall be delivered outside this state through an agent or other representative of the company

issuing the contract.

B

Sections 3 through 8 shall not apply to contingent deferred annuities.

C.

Notwithstanding Subsection B, the commissioner shall have the authority to prescribe, by regulation,

nonforfeiture benefits for contingent deferred annuities that are, in the opinion of the commissioner,

equitable to the policyholder, appropriate given the risks insured, and to the extent possible, consistent with

general intent of this law.

Drafting Note: It is expected that any regulation prescribing specific nonforfeiture requirements for the CDAs and promulgated by the commissioner under Subsection C above would apply only to the CDA contracts issued subsequent to the effective date of such regulation.

Section 3.

Nonforfeiture Requirements

A.

In the case of contracts issued on or after the operative date of this Act as defined in Section 13, no contract

of annuity, except as stated in Section 2, shall be delivered or issued for delivery in this state unless it

contains in substance the following provisions, or corresponding provisions which in the opinion of the

commissioner are at least as favorable to the contractholder, upon cessation of payment of considerations

under the contract:

(1) That upon cessation of payment of considerations under a contract, or upon the written request of the contract owner, the company shall grant a paid-up annuity benefit on a plan stipulated in the contract of such value as is specified in Sections 5, 6, 7, 8 and 10;

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(2) If a contract provides for a lump sum settlement at maturity, or at any other time, that upon surrender of the contract at or prior to the commencement of any annuity payments, the company shall pay in lieu of a paid-up annuity benefit a cash surrender benefit of such amount as is specified in Sections 5, 6, 8 and 10. The company may reserve the right to defer the payment of the cash surrender benefit for a period not to exceed six (6) months after demand therefor with surrender of the contract after making written request and receiving written approval of the commissioner. The request shall address the necessity and equitability to all policyholders of the deferral;

(3) A statement of the mortality table, if any, and interest rates used in calculating any minimum paidup annuity, cash surrender or death benefits that are guaranteed under the contract, together with sufficient information to determine the amounts of the benefits; and

(4) A statement that any paid-up annuity, cash surrender or death benefits that may be available under the contract are not less than the minimum benefits required by any statute of the state in which the contract is delivered and an explanation of the manner in which the benefits are altered by the existence of any additional amounts credited by the company to the contract, any indebtedness to the company on the contract or any prior withdrawals from or partial surrenders of the contract.

B.

Notwithstanding the requirements of this section, a deferred annuity contract may provide that if no

considerations have been received under a contract for a period of two (2) full years and the portion of the

paid-up annuity benefit at maturity on the plan stipulated in the contract arising from prior considerations

paid would be less than $20 monthly, the company may at its option terminate the contract by payment in

cash of the then present value of the portion of the paid-up annuity benefit, calculated on the basis on the

mortality table, if any, and interest rate specified in the contract for determining the paid-up annuity benefit,

and by this payment shall be relieved of any further obligation under the contract.

Section 4.

Minimum Values

The minimum values as specified in Sections 5, 6, 7, 8 and 10 of any paid-up annuity, cash surrender or death benefits available under an annuity contract shall be based upon minimum nonforfeiture amounts as defined in this section.

A.

(1) The minimum nonforfeiture amount at any time at or prior to the commencement of any annuity

payments shall be equal to an accumulation up to such time at rates of interest as indicated in

Subsection B of the net considerations (as hereinafter defined) paid prior to such time, decreased

by the sum of Paragraphs (a) through (d) below:

(a) Any prior withdrawals from or partial surrenders of the contract accumulated at rates of interest as indicated in Subsection B;

(b) An annual contract charge of $50, accumulated at rates of interest as indicated in Subsection B;

(c) Any premium tax paid by the company for the contract, accumulated at rates of interest as indicated in Subsection B; and

Drafting Note: The premium tax credit is only permitted if the tax is actually paid by the company. If the tax is paid and subsequently credited back to the company, such as upon early termination of the contract, the tax credit may not be taken.

(d) The amount of any indebtedness to the company on the contract, including interest due and accrued.

(2) The net considerations for a given contract year used to define the minimum nonforfeiture amount shall be an amount equal to eighty-seven and one-half percent (87.5%) of the gross considerations credited to the contract during that contract year.

B.

The interest rate used in determining minimum nonforfeiture amounts shall be an annual rate of interest

determined as the lesser of three percent (3%) per annum and the following, which shall be specified in the

contract if the interest rate will be reset:

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(1) The five-year Constant Maturity Treasury Rate reported by the Federal Reserve as of a date, or average over a period, rounded to the nearest 1/20th of one percent, specified in the contract no longer than fifteen (15) months prior to the contract issue date or redetermination date under Section 4B(4);

(2) Reduced by 125 basis points;

(3) Where the resulting interest rate is not less than one percent 15 basis points (10.15%); and

(4) The interest rate shall apply for an initial period and may be redetermined for additional periods. The redetermination date, basis and period, if any, shall be stated in the contract. The basis is the date or average over a specified period that produces the value of the five-year Constant Maturity Treasury Rate to be used at each redetermination date.

C.

During the period or term that a contract provides substantive participation in an equity indexed benefit, it

may increase the reduction described in Subsection B(2) above by up to an additional 100 basis points to

reflect the value of the equity index benefit. The present value at the contract issue date, and at each

redetermination date thereafter, of the additional reduction shall not exceed the market value of the benefit.

The commissioner may require a demonstration that the present value of the additional reduction does not

exceed the market value of the benefit. Lacking such a demonstration that is acceptable to the

commissioner, the commissioner may disallow or limit the additional reduction.

D.

The commissioner may adopt rules to implement the provisions of Section 4C and to provide for further

adjustments to the calculation of minimum nonforfeiture amounts for contracts that provide substantive

participation in an equity index benefit and for other contracts that the commissioner determines

adjustments are justified.

Section 5.

Computation of Present Value

Any paid-up annuity benefit available under a contract shall be such that its present value on the date annuity payments are to commence is at least equal to the minimum nonforfeiture amount on that date. Present value shall be computed using the mortality table, if any, and the interest rates specified in the contract for determining the minimum paid-up annuity benefits guaranteed in the contract.

Section 6.

Calculation of Cash Surrender Value

For contracts that provide cash surrender benefits, the cash surrender benefits available prior to maturity shall not be less than the present value as of the date of surrender of that portion of the maturity value of the paid-up annuity benefit that would be provided under the contract at maturity arising from considerations paid prior to the time of cash surrender reduced by the amount appropriate to reflect any prior withdrawals from or partial surrenders of the contract, such present value being calculated on the basis of an interest rate not more than one percent (1%) higher than the interest rate specified in the contract for accumulating the net considerations to determine maturity value, decreased by the amount of any indebtedness to the company on the contract, including interest due and accrued, and increased by any existing additional amounts credited by the company to the contract. In no event shall any cash surrender benefit be less than the minimum nonforfeiture amount at that time. The death benefit under such contracts shall be at least equal to the cash surrender benefit.

Section 7.

Calculation of Paid-up Annuity Benefits

For contracts that do not provide cash surrender benefits, the present value of any paid-up annuity benefit available as a nonforfeiture option at any time prior to maturity shall not be less than the present value of that portion of the maturity value of the paid-up annuity benefit provided under the contract arising from considerations paid prior to the time the contract is surrendered in exchange for, or changed to, a deferred paid-up annuity, such present value being calculated for the period prior to the maturity date on the basis of the interest rate specified in the contract for accumulating the net considerations to determine maturity value, and increased by any additional amounts credited by the company to the contract. For contracts that do not provide any death benefits prior to the commencement of any annuity payments, present values shall be calculated on the basis of such interest rate and the mortality table specified in the contract for determining the maturity value of the paid-up annuity benefit. However, in no event shall the present value of a paid-up annuity benefit be less than the minimum nonforfeiture amount at that time.

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Section 8.

Maturity Date

For the purpose of determining the benefits calculated under Sections 6 and 7, in the case of annuity contracts under which an election may be made to have annuity payments commence at optional maturity dates, the maturity date shall be deemed to be the latest date for which election shall be permitted by the contract, but shall not be deemed to be later than the anniversary of the contract next following the annuitant's seventieth birthday or the tenth anniversary of the contract, whichever is later.

Section 9.

Disclosure of Limited Death Benefits

A contract that does not provide cash surrender benefits or does not provide death benefits at least equal to the minimum nonforfeiture amount prior to the commencement of any annuity payments shall include a statement in a prominent place in the contract that such benefits are not provided.

Section 10. Inclusion of Lapse of Time Considerations

Any paid-up annuity, cash surrender or death benefits available at any time, other than on the contract anniversary under any contract with fixed scheduled considerations, shall be calculated with allowance for the lapse of time and the payment of any scheduled considerations beyond the beginning of the contract year in which cessation of payment of considerations under the contract occurs.

Section 11. Proration of Values; Additional Benefits

For a contract which provides, within the same contract by rider or supplemental contract provision, both annuity benefits and life insurance benefits that are in excess of the greater of cash surrender benefits or a return of the gross considerations with interest, the minimum nonforfeiture benefits shall be equal to the sum of the minimum nonforfeiture benefits for the annuity portion and the minimum nonforfeiture benefits, if any, for the life insurance portion computed as if each portion were a separate contract. Notwithstanding the provisions of Sections 5, 6, 7, 8 and 10, additional benefits payable in the event of total and permanent disability, as reversionary annuity or deferred reversionary annuity benefits, or as other policy benefits additional to life insurance, endowment and annuity benefits, and considerations for all such additional benefits, shall be disregarded in ascertaining the minimum nonforfeiture amounts, paid-up annuity, cash surrender and death benefits that may be required by this Act. The inclusion of such benefits shall not be required in any paid-up benefits, unless the additional benefits separately would require minimum nonforfeiture amounts, paid-up annuity, cash surrender and death benefits.

Section 12. Rules

The commissioner may adopt rules to implement the provisions of this Act.

Section 13. Effective Date

After the effective date of this Act, a company may elect to apply its provisions to annuity contracts on a contract form-bycontract form basis before the second anniversary of the effective date of this Act. In all other instances, this Act shall become operative with respect to annuity contracts issued by the company after the second anniversary of this Act.

______________________________

Chronological Summary of Actions (all references are to the Proceedings of the NAIC).

1977 Proc. I 26, 28, 317, 479, 484-487 (adopted). 1977 Proc. II 555-557 (corrected). 2003 Proc. 1st Quarter15-17, 113-114, 965, 970-973 (amended and reprinted). 2017 3rd Quarter (amended).

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Pending Adoption by the Executive (EX) Committee and Plenary, Dec. 9, 2020 Pending Adoption by the Life Insurance and Annuities (A) Committee, Nov. 10, 2020 Adopted by the Life Actuarial (A) Task Force, Aug. 27, 2020

TABLE 1 PROPOSED 2021 GRET FACTORS, BASED ON AVERAGE OF 2018/2019 DATA

Attachment XXX Executive (EX) Committee and Plenary

12/9/20

Acquisition

Acquisition Acquisition

per

Maintenance

Description

per Policy per Unit Premium per Policy

Independent

$166

$0.90

42%

$50

Career

214

1.20

54%

64

Direct Marketing

195

1.10

49%

59

Niche Marketing

137

0.80

34%

41

Other*

126

0.70

32%

38

* Includes companies that did not respond to this or prior year surveys

Companies Included 121 63 15 26 67 292

Average Premium Per Policy Issued

During Year 2,916

2,517

2,933 590

836

Average Face Amt (000) Per Policy

Issued During Year 194

195

119 11

29

TABLE 2 CURRENT 2020 GRET FACTORS, BASED ON AVERAGE OF 2017/2018 DATA

Acquisition

Acquisition Acquisition

per

Maintenance

Description

per Policy per Unit Premium per Policy

Independent

$168

$0.90

42%

$50

Career

214

1.20

54%

64

Direct Marketing

217

1.20

54%

65

Niche Marketing

125

0.70

32%

38

Other*

140

0.80

35%

42

* Includes companies that did not respond to this or prior year surveys

Companies Included 118 63 20 21 104 326

Average Premium Per Policy Issued

During Year 3,263 2,661

2,489

757

876

Average Face Amt (000) Per Policy

Issued During Year 200 217

213

13

34

APPENDIX A -- DISTRIBUTION CHANNELS

The following is a description of distribution channels used in the development of recommended 2021 GRET values:

1. Independent ? Business written by a company that markets its insurance policies through an independent insurance agent or insurance broker not primarily affiliated with any one insurance company. These agencies or agents are not employed by the company and operate without an exclusive distribution contract with the company. These include most PPGA arrangements.

2. Career ? Business written by a company that markets insurance and investment products through a sales force primarily affiliated with one insurance company. These companies recruit, finance, train, and often house financial professionals who are typically referred to as career agents or multiline exclusive agents.

3. Direct Marketing ? Business written by a company that markets its own insurance policies direct to the consumer through methods such as direct mail, print media, broadcast media, telemarketing, retail centers and kiosks, internet or other media. No direct field compensation is involved.

4. Niche Marketers ? Business written by home service, pre-need, or final expense insurance companies as well as niche-market companies selling small face amount life products through a variety of distribution channels.

5. Other ? Companies surveyed were only provided with the four options described above. Nonetheless since there were many companies for which we did not receive a response (or whose response in past years' surveys confirmed an "other" categorization (see below), values for the "other" category are given in the tables in this memo. It was also included to indicate how many life insurance companies with no response (to this survey and prior surveys) and to indicate whether their exclusion has introduced a bias into the resulting values.

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Attachment XXX Executive (EX) Committee and Plenary

12/9/20

APPENDIX B ? UNIT EXPENSE SEEDS The expense seeds used in the 2014 and prior GRETs were differentiated between branch office and all other categories, due to the results of a relatively old study that had indicated that branch office acquisition cost expressed on a per Face Amount basis was about double that of other distribution channels. Due to the elimination of the branch office category in the 2015 GRET, non-differentiated unit expense seeds have been used in the current and immediately prior studies.

The unit expense seeds used in the 2021 GRET and the 2020 GRET recommendations were based on the average of the 2006 through 2010 Annual SOA expense studies. These studies differentiated unit expenses by type of individual life insurance policy (term and permanent coverages). As neither the GRET nor the Annual Statement data provided differentiates between these two types of coverage, the unit expense seed was derived by judgment based this information. The following shows the averages derived from the Annual SOA studies and the seeds used in this study. Beginning with the 2019 Annual Statement submission this information will become more readily available.

2006-2010 (AVERAGE) CLICE STUDIES:

Term Weighted Average Unweighted Average Median

Acquisition/ Acquisition/ Policy Face Amount (000)

$149 $237 $196

$0.62 $0.80 $0.59

Permanent Weighted Average Unweighted Average Median

$167 $303 $158

$1.43 $1.57 $1.30

Acquisition/ Premium

38% 57% 38%

Maintenance/ Policy

$58 $76 $64

42%

$56

49%

$70

41%

$67

CURRENT UNIT EXPENSE SEEDS:

Acquisition/ Acquisition/ Policy Face Amount (000)

All distribution channels

$200

$1.10

Acquisition/ Premium

50%

Maintenance/ Policy

$60

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Attachment XXX Executive (EX) Committee and Plenary

12/9/20

TO: Reggie Mazyck, NAIC

FROM:

DATE: RE:

Dale Hall, Managing Director of Research, Society of Actuaries (SOA) Leon Langlitz, Chair, SOA Committee on Life Insurance Company Expenses July 23, 2020 2021 Generally Recognized Expense Table (GRET) ? SOA Analysis

Dear Mr. Mazyck:

As in previous years, the Society of Actuaries expresses its thanks to NAIC staff for their assistance and responsiveness in providing Annual Statement expense and unit data for the 2021 GRET analysis for use with individual life insurance sales illustrations. The analysis is based on expense and expense related information reported on companies' 2018 and 2019 Annual Statements. This project has been completed to assist the Life Actuarial Task Force (LATF) in its consideration of potential revisions to the GRET that could become effective for calendar year 2021. This memo describes the analysis and resultant findings.

NAIC staff provided Annual Statement data for life insurance companies for calendar years 2018 and 2019. This included data from 722 companies in 2018 and 776 companies in 2019. This increase breaks the trend of small decreases over the previous few years. Of the total companies, 292 were in both years and passed the outlier exclusion tests and were included as a base for the GRET factors (326 companies passed similar tests last year).

APPROACH USED The methodology for calculating the recommended GRET factors based on this data is similar to that followed the last several years. The methodology was last altered in 2015. The changes made at that time can be found in the recommendation letter sent to LATF on July 30, 20151.

To calculate updated GRET factors, the average of the factors from the two most recent years (2018 and 2019 for those companies with data available for both years) of Annual Statement data was used. For each company an actual-to-expected ratio was calculated. Companies with ratios that fell outside predetermined parameters were excluded. This process was completed three times to stabilize the average rates. The boundaries of the exclusions have been modified from time to time; however, there were no adjustments made this year. Unit expense seed factors (the seeds for all distribution channel categories are the same), as shown in Appendix B, were used to compute total expected expenses. Thus, these seed factors were used to implicitly allocate expenses between acquisition and maintenance expenses, as well as among the three acquisition expense factors (on a direct of ceded reinsurance basis).

Companies were categorized by their reported distribution channel (four categories were used as described in Appendix A included below). There remain a significant number of companies for which no distribution channel was provided, as no responses to the annual surveys have been received from those companies. The characteristics of these companies vary significantly, including companies not currently writing new business or whose major line of business is not individual life insurance. Any advice or assistance from LATF

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Attachment XXX Executive (EX) Committee and Plenary

12/9/20

in future years to increase the response rate to the surveys of companies that submit Annual Statements in order to reduce the number of companies in the "Other" category would be most welcomed. The intention is to continue surveying the companies in future years to enable enhancement of this multiple distribution channel information.

Companies were excluded from the analysis if (1) their actual to expected ratios were considered outliers, often due to low business volume, (2) the average first year and single premium per policy were more than $40,000, (3) they are known reinsurance companies or (4) their data were not included in both years of the data supplied by the NAIC. To derive the overall GRET factors, the unweighted average of the remaining companies' actual-to-expected ratios for each respective category was calculated. The resulting factors were rounded, as shown in Table 1.

THE RECOMMENDATION The above methodology results in the proposed 2021 GRET values shown in Table 1. To facilitate comparisons, the current 2020 GRET factors are shown in Table 2. Further characteristics of the type of companies represented in each category are included in the last two columns in Table 1, including the average premium per policy issued and the average face amount ($000s) per policy issued.

To facilitate comparisons, the current 2020 GRET factors are shown in Table 2. Further characteristics of the type of companies represented in each category are included in the last two columns in Table 1, including the average premium per policy issued and the average face amount ($000s) per policy issued.

TABLE 1 PROPOSED 2021 GRET FACTORS, BASED ON AVERAGE OF 2018/2019 DATA

Acquisition

Acquisition Acquisition

per

Maintenance

Description

per Policy per Unit Premium per Policy

Independent

$166

$0.90

42%

$50

Career

214

1.20

54%

64

Direct Marketing

195

1.10

49%

59

Niche Marketing

137

0.80

34%

41

Other*

126

0.70

32%

38

* Includes companies that did not respond to this or prior year surveys

Companies Included 121 63 15 26 67 292

Average Premium Per Policy Issued

During Year 2,916

2,517 2,933

590

836

Average Face Amt (000) Per Policy

Issued During Year 194

195 119

11

29

TABLE 2 CURRENT 2020 GRET FACTORS, BASED ON AVERAGE OF 2017/2018 DATA

Acquisition

Description

Acquisition Acquisition

per

Maintenance

per Policy per Unit Premium per Policy

Independent

$168

$0.90

42%

$50

Career

214

1.20

54%

64

Direct Marketing

217

1.20

54%

65

Niche Marketing

125

0.70

32%

38

Other*

140

0.80

35%

42

* Includes companies that did not respond to this or prior year surveys

Companies Included 118 63 20 21 104 326

Average Premium Per Policy Issued

During Year 3,263

2,661

2,489

757 876

Average Face Amt (000) Per Policy

Issued During Year 200

217

213

13 34

4

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